Amazon, California play waiting game in sales tax fight

Amazon's refusal to collect California sales taxes won't be official until an Oct. 1 deadline.

Amazon.com Inc. said Wednesday that it will stop working with online affiliates… (Paul Sakuma / Associated…)

Reporting from Sacramento and Los Angeles — Amazon.com Inc. is sticking by its vow not to collect California sales tax on Internet purchases — and state officials must decide what to do about it.

But the showdown over the new tax collection law that took effect Friday could be months away. Companies don't send the taxes to the state until the end of each quarter, which means the California Board of Equalization won't know officially about Amazon's refusal to collect them until Oct. 1.

The tax-collecting agency said Amazon accounts for about half the Internet sales in California from large out-of-state firms that, prior to the new law, did not have to collect sales tax for the state. It said the new law would capture about $317 million a year in sales taxes that previously went uncollected.

Amazon, based in Seattle, has said repeatedly that it would not collect the California sales tax, calling it an unconstitutional infringement on interstate commerce.

Such defiance sets up a major legal battle by this fall, though Amazon could first challenge the law in court, as it has in New York. It has lost a trial court ruling there and has an appeal pending.

Amazon is "going to fight in every state where it can fight," said Tracey G. Sellers, managing director of the Tampa, Fla., office of tax firm True Partners Consulting. "It's going to be years before this whole issue is settled" in the courts.

Amazon declined to say whether it would sue to overturn the new California statute, though state officials expect a lawsuit.

Experts have mixed opinions about how possible or pending legal challenges might turn out in California and at least seven other states with tax collection laws covering online sales.

"Barring a change in federal law, California has no chance," said Steve Gill, a professor of taxation at San Diego State University. "There's literally nothing they can do. The tax law is and has been pretty darn clear on this issue for decades."

Gill said that a change in sales tax rules at the federal level would need to be hammered out in order for Amazon to comply, but that Congress has "no real appetite" to tackle the issue.

"In my view, California played their hand, and Amazon called their bluff," he said.

Before suing California, Gill said, Amazon might wait for its New York case to play out. That suit could go to the U.S. Supreme Court, he said, "and then we'll have a definitive answer."

John Swain, a state and local taxation law expert at the University of Arizona, argued that California has a good shot at success.

"The smart money is behind the California taxing authority," he said, if the state's lawyers can establish that Amazon physically does business here.

The law affects about 2,000 out-of-state Internet companies that have established some business relationships here — workers, partners, offices or other operations.

If Amazon has such connections in California, then it has a "serious problem," Swain said.

Amazon moved quickly Wednesday to get rid of its connections to the state by axing about 10,000 California affiliates that were paid commissions for funneling business to Amazon through their websites.

The company still has separate business operations in the state, including a laboratory that develops Kindle e-readers in the Silicon Valley, but declined to disclose what, if anything, it planned to do with them.

The new law also gives the Board of Equalization the authority to develop new theories that would establish a nexus or legal connection, making Amazon liable for collecting California sales taxes.

"This swings the gate wide open to establish nexus as we see fit," said Betty Yee, a board member who spearheaded the agency's support for the law. But she acknowledged that any other theories the board devises would probably be tested in court.

The difficulty in enacting state laws on tax collection stems from efforts to comply with a 1992 U.S. Supreme Court ruling that a state can require out-of-state companies to collect sales taxes only if those companies have some physical presence in the state.

Internet retailers with no bricks-and-mortar presence in the state said the ability to sell without adding sales taxes helps them offer lower rates, operate on a smaller profit margin and attract and keep customers who otherwise might simply shop at the nearest store.

Gov. Jerry Brown, who signed the measure into law Wednesday, saw an extra $317million in sales taxes annually as a way to help shore up a battered state budget. Brown and local businesses also said that it's only fair to require Internet companies to do the same thing that bricks-and-mortar shops have been doing.

Even some former Amazon affiliates, such as Tim Ware of Oakland, who owns a Web design and development firm, agreed.

"If people are going to buy books, they can either go to the bookstore in their town or they can go to Amazon. I think either way, they should pay sales tax because it's unfair competition for local booksellers," Ware said.

"When you boot up your computer and click on Amazon," he said, "they are in your state; they are in your room."